After the death of a shareholder, the trustee would collect the proceeds of the insurance and deliver them to the estate of the deceased shareholder in exchange for the shares of the deceased shareholder. The Escrow agent would then credit the account of each remaining shareholder with the corresponding percentage of the proportional ownership of the shares purchased. While the trust agreement can be effective in reducing the number of policies required, shareholders should also establish a separate partnership or LLC with a specific business purpose (as stated above) in order to avoid a transfer of value issue after the death of a shareholder. Note for companies S: One of the most common questions I am asked is whether a company should implement a simple business purchase contract or a “cross purchase” contract. Since many nearby companies are S companies, the answer from a tax perspective is that it really doesn`t matter. The major drawback that most consultants point out in a corporate agreement is that surviving shareholders do not receive a base increase after a shareholder`s death. For companies with an S cash base, there is a way around this situation, called 1377 (short fiscal year). The measures generally taken to increase the base of surviving shareholders by choosing the short fiscal year are as follows (in the hypothesis of three shareholders): the next task in structuring a buy-sell contract is to define the events that will trigger the sale of the shares. No increase in the base for the remaining shareholders. The withdrawal of the shares of a deceased shareholder results in an increase in the percentage of shares of the company held by the surviving shareholders, while the base of the remaining shareholders in their shares remains the same. Suppose A and B each own 50% of a company or 50 shares each, and each has a $100 base in its 50 shares. A`s shares are cashed out for 300$US.B would continue to own 50 shares after its withdrawal and would have a $100 base in its shares. However, B`s shares now represent 100% of the company`s issued and outstanding shares.

If B then sold his shares for 600$US, B would recognize a capital gain of $500 ($600 received minus $100 $US). Several directives are necessary for the life of each shareholder. When insurance is used to fund the obligation to purchase in the event of death, a cross-purchase contract normally requires each owner to have separate insurance policies for the life of the other owner. There are at least two techniques to structure a cross-purchase contract with multiple owners to avoid the need for multiple guidelines for each owner`s life. Example 2: J and his two brothers G and F founded H, Inc. 10 years ago. In the first eight years, the three brothers were equal shareholders, but in the last two years, the shares (by donation and sale) were distributed to one son of J, two daughters of G and three sons of F. All current shareholders are in good health. The general rule applicable to a share withdrawal agreement varies widely. A shareholder who returns his shares receives a dividend. The treatment of dividends is detrimental because (1) dividends are treated as ordinary income (subject to higher tax rates than capital gains) and (2) the total amount received is taxed without compensation for the base of the repaid shares. Fortunately, there are several exceptions to the general rule that requires dividend treatment, and while careful planning often avoids dividend processing..

. .